How many times have you seen this situation? You have an
attractive investment opportunity that you would like to bring to the
attention of a potential investor but they are reluctant to provide
you with the details of their full financial picture. You believe they
are an accredited investor (AI) but you are not sure. You need
to get this right since you can only do the private placement in
reliance on the accredited investor exemption (the AI exemption)
set out in section 2.3 of National Instrument 45-106 – Prospectus
and Registration Exemptions (NI 45-106). What do you do? Does it
matter if you get it wrong?

Canadian securities regulators are increasingly concerned thatissuers and exempt market dealers (EMDs) are getting it wrongand selling exempt securities to non-AIs – the public. Moreover,issuers and EMDs that complete transaction with investors whoare not AIs in reliance on the AI exemption may be exposingthemselves to regulatory risks and potential civil liability.

This article explores the AI exemption under Canadian
securities law, examines recent developments in the United
States involving the verification of AIs under U.S. securities law,
and poses several survey questions seeking input on how we can
increase compliance with the AI exemption in Canada.

Why is the AI exemption important?

The AI exemption is an important prospectus exemption in
Canada since the most capital is raised under it. For example,
Ontario Securities Commission (OSC) Notice 45-705 states that:

“The exempt market in Canada has become increasingly
important for investors and issuers. The total amount